Foreign investors turn to Asian bonds

Foreign investors are piling back into Asian bonds as they seek out the region's attractive yields in the wake of waning prospects of a near-term interest rate hike by the United States' Federal Reserve.

Growing fears that the June 23 referendum in Britain could see it exit the European Union have also fed demand for sovereign debt, which in turn has bolstered emerging Asian paper, analysts say.

While the heightened risk aversion over the past two weeks has buoyed bonds globally, the potential capital gains from expected further policy easing in Asia and the relatively higher yields in the region remain an attraction.

"Apprehension ahead of the United Kingdom's EU referendum vote on June 23 may be partly attributable to the latest bout of risk aversion but emerging market rates should remain resilient," wrote Mr Andre de Silva, HSBC's head of emerging market rates research, in a note. "The era of 'yield grab' is still firmly entrenched."

In the first 10 days of June, foreign investors boosted their holdings of Indonesia's government bonds by 16.5 trillion rupiah (S$1.62 billion), after cutting 4.2 trillion rupiah last month, data from the finance ministry showed.

That came as Bank Indonesia governor Agus Martowardojo suggested on May 25 that the central bank may ease policy this week.

In South Korea, foreign investors bought a net 1.1 trillion won (S$1.26 billion) worth of local bonds in the first 13 days of June, according to preliminary data from the Financial Supervisory Service.

The country's bond yields are lower in emerging Asia but much higher than in developed markets such as Japan and some European countries, investors note.

"We consider Korea as an attractive fixed income market to invest in as it attracts more developed market investors rather than traditional emerging market investors," said Mr Jens Nystedt, portfolio manager, emerging market debt team, at Morgan Stanley Investment Management in New York.

"Relative to other opportunities in developed markets, Korea can still offer an attractive yield, even on a currency hedged basis, in the long end of the curve."

Mr Nystedt also expects Malaysia and Indonesia to cut interest rates by a total of 50bps before year-end, which will attract bond inflows. India is also predicted to ease policy rates in coming months and lure foreign investors to the country's debt markets, he added.

Foreign investors cut Malaysian bond holdings in May, the central bank data showed, amid concerns over state fund 1Malaysia Development Berhad.

Thailand reported bond inflows last month, according to the Thai Bond Market Association.


A version of this article appeared in the print edition of The Straits Times on June 15, 2016, with the headline 'Foreign investors turn to Asian bonds'. Print Edition | Subscribe